This article is a companion piece to this episode of our educational series on subrogation law and procedure, On Subrogation: The Graves Amendment, where Rathbone Group subrogation lawyer Jason Sullivan discusses how the Graves Amendment affects pursuit of recovery in subrogation cases involving rental car companies.

The Graves Amendment & Liability of Leasing Companies for Damages

The Graves Amendment, named for Samuel Graves (R-MO), is a federal law passed in 2005. It provides protection to rental car and leasing companies from liability for damages or injuries caused by an operator of those vehicles. This article focuses on automobile rental companies, but the Graves amendment and laws also applies to leasing companies. 

Subrogation Liability & Process for Leasing Entities before the Graves Amendment

Before 2005, rental car companies could be sued for the damages that resulted when an individual rented a car and then proceeded to commit a tortious act with the vehicle. Although the rental car companies had no control over what happened once the car was driven off their lot, they faced numerous costly law suits. When severe damage resulted, courts handed down multi-million dollar judgments. 

Rental Car companies approached Congress, arguing that these lawsuits were threatening to put the industry out of business; the insurance coverage required to cover their liability exposure was simply too onerous an expense. They hand the keys to multitudes of drivers without knowing their driving history or the quality of their driving. Indeed, anyone within a certain age range and with a valid license who is willing to pay the contract fee is extended the opportunity to rent a car. The rental car companies felt that they could not – and should not have to – be financially responsible for every renter’s actions. Congress agreed, and today we have the Graves Amendment.  

The first section of the Graves Amendment states:

49 USC 30106. Rented or leased motor vehicle safety and responsibility

(a) In General.—An owner of a motor vehicle that rents or leases the vehicle to a person (or an affiliate of the owner) shall not be liable under the law of any State or political subdivision thereof, by reason of being the owner of the vehicle (or an affiliate of the owner), for harm to persons or property that results or arises out of the use, operation, or possession of the vehicle during the period of the rental or lease, if—

(1) The owner (or an affiliate of the owner) is engaged in the trade or business of renting or leasing motor vehicles; and

(2) there is no negligence or criminal wrongdoing on the part of the owner (or an affiliate of the owner).

Determining Who is Covered by the Graves Amendment in a Subrogation Case

When subrogating an insurance claim, it is important to first understand who is protected by the Graves Amendment, and who is not.  This language covers those in the business of renting or leasing cars. This does NOT apply to a friend loaning a car, and it does not apply to a one-off rental.  

In order to enjoy the protection of the Graves Amendment, a company must be in the business of renting or leasing vehicles. Subrogating lawyers should not assume that the Graves Amendment protects every situation where a car is purported to be rented.  

Getting Around the Graves Amendment

Despite the Graves Amendment, there are three particular situations where a rental company may have direct financial responsibility for damage done by their rental cars. Subrogation lawyers who are investigating an insurance claim file look at all the facts of the case to determine if their case is an exception to the general immunity provided by the Graves Amendment. These are situations where a rental car company has itself breached a duty of care, giving rise to liability for the subrogated damages at issue.

(1) Negligent Entrustment

In this context, Negligent Entrustment is giving the keys of an automobile to someone who is clearly a dangerous or incompetent driver.  Let’s pose a few hypothetical examples:

A man is going on vacation. He has a few drinks waiting to board his plane, followed by additional drinks on the plane. After deplaning, he stumbles to the car rental agency, where the desk employee knows or should know that the customer is intoxicated. If that drunk person is the only named driver on the agreement, the rental company presumably acted negligently by allowing the man to take the car. Insurance companies subrogating a claim in this situation should be able to recover losses from the rental car company. 

Here is another example: 

A customer doesn’t have a driver’s license. If the rental employee overlooks this detail, it can give rise to a direct cause of action under a negligent entrustment theory. Using a subrogation legal theory, an insurance company will likewise have a cause of action directed toward the rental car company.  

Similarly, suppose a customer presents a document without a photo, written entirely in a foreign language. The rental car company employee can’t read the document. The customer asserts that it is a valid licensing document, and the employee takes her on her word. When the customer drives away and causes an accident, a court will likely find there is a question of fact as to whether or not the employee breached a duty of care, and the Graves Amendment may not protect the rental company in that situation.  

A good subrogating legal team will investigate facts like this to help their insuring client maximize recovery. In these types of subrogation cases, Rathbone Group subrogation specialists and attorneys look into every relevant details regarding that initial interaction between the rental car company (employee) and the party who rented the car, identifying possible pitfalls that might leave the rental car company liable.

(2) Negligent Maintenance

Car rental companies have a duty to maintain their vehicles and keep them in good working order, meaning they are safe to operate. Has the rental company ignored reports about mechanical problems, such as squeaking breaks, or failed to conduct routine or scheduled maintenance on the fleet of cars? If so, and that failure leads to an accident while a customer is driving the car, the Graves Amendment will not shield the rental car company from liability for the accident.

In this context, subrogation law still offers insurance companies the opportunity to recover from car rental companies. Whenever an insurance claim file involves a rental car company, any allegation of malfunction or defect of the rental car should be thoroughly investigated by the subrogation team managing the case.

(3) Employee Negligence

If the employee of a car rental company is driving the rental car at issue in the scope of their employment, the employer can still be found liable for the damage caused by their employee, despite the Graves Amendment. Mere ownership of a vehicle cannot be a basis for liability, but a rental car company will still have direct liability for any breach of duty by its employees under the theory of vicarious liability, which we discuss in a companion article to another one of our On Subrogation episodes

In terms of a company’s financial responsibilities, it makes a big difference if the driver is an employee rather than a customer.  Any time an insurance claim involves an employee driving a rental car, subrogating directly against the rental car company remains a viable option.

Financial Liability Laws

The Graves Amendment is a federal law, and therefore applies in every state. The second section addresses state-imposed financial liability laws.  This section of the Graves Amendment states:

(b) Financial Responsibility Laws.—Nothing in this section supersedes the law of any State or political subdivision thereof—

(1) imposing financial responsibility or insurance standards on the owner of a motor vehicle for the privilege of registering and operating a motor vehicle; or

(2) imposing liability on business entities engaged in the trade or business of renting or leasing motor vehicles for failure to meet the financial responsibility or liability insurance requirements under State law.

This sounds confusing. If the Graves Amendment asserts that a rental car company can’t be found liable simply for being the owners of a rented vehicle, why would a state be allowed to impose financial responsibility standards? The answer is that direct causes of action, such as negligent maintenance, negligent entrustment, and negligent operation by an employee discussed above, are types of state-imposed liability laws. When proceeding under one of those legal theories, the law of the relevant state jurisdiction applies. 

So, section (b) addresses this legal interplay.  Rental car companies still maintain insurance policies for the situations when they have direct liability under a state’s negligence theory, and section (b) makes it clear that rental car companies still face exposure if they violate a state’s financial responsibility laws. While the Graves Amendment provides protection to rental car companies, it is clear that subrogating against a rental car company is sometimes a valid and correct course of action.

How Rental Car Purchase Insurance offers Alternate Avenues to Subrogation Recovery

When the customer signs a rental agreement, she has the opportunity to purchase additional liability insurance through the rental company. It covers damages the customer causes with the rented vehicle. Suppose an insured driver is harmed by a rental car driver. From a subrogation standpoint, in the course of the investigation, it is important to get a copy of the rental agreement. If the rental car driver purchased additional liability coverage at the counter, it still does not make the rental car company liable for the loss. However, it does offer an additional avenue for recovering damages. In this way, subrogating this type of claim can increase the odds for a loss recovery.  

Summary & Checklist for Dealing with the Graves Amendment in a Subrogation Claims Case

From a subrogation recovery perspective, if an insurance company is dealing with the Graves Amendment, and specifically the tortfeasor was operating a rental car vehicle, the following checklist offers a concise list of the legal theories to consider:

  • First, is there direct liability under one or more of the following legal theories: 
    • Negligent entrustment
    • Negligent maintenance
    • Negligence by a car rental employee
  • Second, did the renter take out additional liability coverage?

Despite the fact that the Graves Amendment abolishes vicarious liability for rental car companies, they still can be liable for their negligent actions; they just can’t be held vicariously liable for the negligence of their customers. Subrogation legal teams need to conduct a thorough investigation to determine whether or not the subrogating insurance carrier might find a way around the Graves Amendment, and that way they can maximize recovery options by pursuing a subrogation claim against a rental car company.